Christina Zhang – Barclays Capital
Hi, good afternoon and welcome to the second day of the Global Barclays Healthcare Conference. My name is Christina Zhang and I am the biopharma analyst here at Barclays. And here with us is Dr. Frank Laukien from Bruker Corporation.
Frank H. Laukien
Thanks very much, Christina. And we are now in the double-digit, so I appreciate that very much. Thank you very much for joining us this afternoon.
I'd like to point out my colleague, Stacey Desrocher, our Investor Relations Officer; she's also our Treasurer. So I need discerning questions about leverage, hedging, our balance sheet, cash flow, will all be answered by Stacey.
Let me take you through some of the highlights of what we're doing at Bruker. One thing that I'd like to point out that's not in this presentation yet, we just had a press conference at the Pittsburgh Conference or PITTCON yesterday, where we introduced several new products, including some systems for FT-IR for Hyperspectral Imaging, a number of important products. I wouldn't call them game changers, but solid products, very unique competitive profiles, and I think also very good margins.
So please refer to our website, to our latest press releases. There was quite a bit of Bruker innovation coming out at PITTCON. And yesterday we presented it to a non-financial audience of science editors and hopefully they'll write lots of great articles about it.
So I think you are familiar by now with our Safe Harbor statements and these are the fundamentals that's really the culture of Bruker. We are focused on fast profitable growth. Yes, we consider ourselves a growth company even at $1.6 billion, and at any given time, given the organic growth engine, given our investment in innovation and in new products, we really have delivered a lot of that in the year 2009. When everybody was down, we were still growing 2%. Last year we grew 26%, and as you may see later, this year we're projecting 7% to 10% organic growth, which I think is very good.
So, fast growth, fast profitable growth. We had excellent margin expansion in 2009-2010. In 2011 we were not fully satisfied with our margin expansion and we've set pretty aggressive goals, but hopefully a conservative guidance of a 120 to 140 BPS operating margin expansion for our scientific instruments business.
So you see a company focusing on innovation, focusing on organic growth. Financially that also means we're very much focused on ROIC. I think just EPS accretion, cash EPS accretion, because credit is inexpensive, and with acquisitions, I think that's not good enough. I think I as a shareholder of this company, and our Bruker Board certainly and hopefully many of our investors are expecting more of that. Of course working capital ratio improvements, it's been a long day of one-on-ones, but also very much ROIC, where we right now are the low 20s and hope to get back to the high 30s where we have been traditionally also previously as a private company.
So without dwelling on these slides, I think you know that by now we have a rather diversified 51-year-old, I would call it a transatlantic company. We started in Europe from a number of organic initiatives and some acquisitions that we did recently. We now very much have R&D and manufacturing on both sides of the Atlantic. We don't own any factories in Asia. We do a lot of manufacturing, and a lot of manufacturing is done for us in Asia, and of course we serve the markets in Asia, Europe and North America.
I think very important then really, a point that in numerous one-on-ones today I ended up making over and over again the fact, why are we growing so fast with concerns about Europe and CapEx and NIH? There should be three strikes against Bruker, at least that was the storyline that I have heard very often in the middle of last year.
Our relentless focus on product R&D and innovation is part of the story. And the other story is sort of in that yellow text box here, more important than what's happening in Mediterranean Europe, or whether NIH spending is going up or down or going sideways, are really these secular trends in the life sciences, post-genomics, epigenetics, a much more differentiated approach to proteomics where the traditional grind up all sales were marginized and then digested. It's kind of a primitive way of doing proteomics. That's how you collect all the bricks, but that's not how you build the house.
I think the approach of doing Spatial Proteomics like a pathologist would, where you retain the cellular or tissue information with imaging mass spectrometry, top-down proteomics, very important if you really want to get complete information, including functional information, including annoying, vexing, but the reality in biology, heterogeneous protein samples, you do not get that from a bottom-up proteomics approach.
Very key, and that takes us to the next topic and big secular trend is the push in biologics or Biosimilars, Biogenerics. But biologics generally, we hope to do with our unique mass spectrometry tools of MALDI TOF/TOF and our unique maXis ultra-high resolution, Qq-TOF mass spectrometry lines, we can do completely unique things that nobody else in mass spectrometry can do for top-down proteomics, for looking at intact proteins, to measure all the way to intact antibodies, and without digesting them looking at glycosylation levels, looking at what may have gone wrong in a fomenter for a biologics drug, of course doing the same things in late developments, during FDA submissions.
There I think we have a chance of doing what ABI or AB Sciex did 20, 30 years ago with triple quadruples in small molecule ADMET. I think this time for proteomics and biologics, Bruker will be perhaps not without competition, but I think we have an absolutely technologically pole position to provide the tools for the key questions that people in pharmaceutical and biotech companies are asking, and need to be asking, as the FDA will ask them as soon as these technologies are available to give those measurements. And for that again, we have the unique tools at this point. Nobody else can do what we can do.
So those type of tailwinds MALDI Biotyper for clinical microbiology, I think is one of the complete paradigm changes that we have driven, together with a lot of collaborators, in this case primarily in Europe for changing the paradigm towards proteomic fingerprinting that is faster, with faster time to results in clinical microbiology. It has a huge impact on clinical practice, it comes at a lower cost, and it gives us a more differentiated picture. so you really for once you get the best of our worlds and accordingly it's really been the paradigm change that's even been accepted by now by the other clinical microbiology companies.
Again, something that has very high margins for us. That's a 60% gross margin business. And again, these type of growth drivers, profitable growth drivers with higher margins, these are just some of the life science examples that I’ve chosen here. I could have also gone into the fab and semiconductor and data storage and nanotechnology world. Those are really more important for Bruker certainly than whether or not the NIH budget is going down 2% or up 1%.
I'm reiterating some of the themes that I've heard today. I think that's perhaps a little bit more relevant to go into some of the latest themes rather than word-by-word reading my own slides. It's been an interesting day for us of investor feedback.
I don't think I'll spend much time on that. That’s on our website. Maybe the trend for those of you who may have been following us for some years is that we are more diversified, we’ve been growing more rapidly in industrial, in pharmaceutical and biotech, as well as in applied markets and clinical markets. That's a good trend. We have more diversification, we have better geographic diversification than even three or four years ago and it has served us well.
Along with these secular trends that I described earlier and our aggressive new product strategy, with better productivity, that R&D engine than I think any other large diversified company in our space, we have not only achieved fast growth last year, but also an even higher backlog and better visibility into this year that supports our ambitious, but I think also very doable projections in terms of growth and margin improvements.
Via some of the acquisitions we did in recent years we increased our addressable, our served addressable markets quite a bit. In some of our areas, where we are a clear number one or perhaps strong number two, eventually we could see that this could limit our growth in the next few years and perhaps keep us to single-digit growth, something that we don't want to settle for.
So with, for instance the CAM acquisition, which has opened up another $2 billion, $2.5 billion of chromatography and applied and food safety and chemical, petroleum markets for gas chromatography, liquid chromatography, GC-MS, ICP-MS, we’ve opened some very large markets, some markets that I think are starved for innovation, and we intend to bring a fresh breeze of innovation into these markets. You’ve seen some of our product introductions already in ‘11 and you will see a lot more in ’12 and ’13.
Similarly, the microscopy and high-resolution microscopy markets with atomic force microscopy and stylus and optical metrologies that sometimes referred to by investors that the Veeco acquisition, because we bought those assets from Veeco in other public company. Have also opened the door to us for non-spectroscopy, more imaging microscopy oriented markets and we’re very excited about that.
I think that has by itself increased our addressable market and I think has changed the horizons to where, I’m not worried in the next five to 10 years about saturating in markets. I think we have plenty of opportunity and with our innovation and high RoIC strategy, I think we are in a good way to gaining more market share in just about every area in which we have been active. It’s really working very well from a competitive sense.
No need to dwell on this, this just shows the prolific new product outputs. Some of these are bread and butter products, some of these are game changing products and this is driving and fueling our growth along with the mega trends in science and technology from which we are benefiting. This is what we achieved last year.
And again without digging into the details that it already seems like it’s a long time ago, but we grew very rapidly. We didn’t grow our margins as quickly as is in the prior two years. So I would concede that last year in terms of execution we are maybe firing on six out of eight cylinders, but not on all eight.
The prior two years, I would also say in our defense we had predicted about 100 bps margins improvement in the prior two years. We delivered about 200. So our track record is pretty good. But last year I was not fully satisfied with our margins moving sideways. Although I am very satisfied that we took the very large growth that – and that we have the rather good problem, although it is a bit of a problem having very large backlog, which we’d like to bring down this year, but at least it does give us very good visibility.
Here our financial goals, I won’t dwell on the first quarter. But for the full-year, currency adjusted revenue growth of 7% to 10%. For our scientific instruments business, we expect 15% to 18% operating growth from 120 bps to 140 bps margin improvements. In terms of EPS for our scientific instruments segment which is more than 90% of the company that we’re looking at $0.94 to $0.98. That’s also up in the teens from the adjusted number for last year. By the way, for those of you who have been modeling us, we are as of 2012 and in our pro forma comparison numbers now including non-cash stock-based compensation expense, which previously we did not do.
For the working capital improvement, a continued improvement of our RoIC, which is already quite good, but we’d like to push that to the 25% to close to 25% and ultimately over the next three years even to 30% again, and operating and cash flow numbers.
Our medium-term goals remain unchanged, mainly we expect to become a $2 billion or greater than $2 billion company by 2014 with an adjusted operating margin of $18 billion. In our scientific instruments business, we’re including now stock-based compensation as I said, but we’re excluding our CAM division, which is a very new investment and we think in terms of margin improvement that will be about two to three years behind the rest of the company.
But again since we acquired that as you will see for a very low investment, we think that’s another, there we’re behaving almost more like a private equity company looking for a five-year, very high RoIC, but being willing to invest for two or three years to build a really good asset and create shareholder value that way.
I really have referred to that, so I will not spend time on these slides. They’re obviously on our webpage and you can also get this information from our latest earnings releases and so on. We’re proud to have a very solid balance sheet. Our leverage of 1.2 times EBITDA gives us flexibility. Although we don’t really intend to go to high leverage except for perhaps a very short period of time. But having about 1 times or 1.2 times leverage as a structural long-term debt, that we did a long-term debt financing. I think that’s a good structural element of our balance sheet. We’re not totally debt diverse, which is diverse. We’re just not unlikely to have high leverage ever.
So one of the investments that I’ve been mentioning a number of times, the chemical and applied markets division, started with three assets or three businesses that we bought from the Varian, Inc., they have to be divested when they were purchased by Agilent in middle of 2010. We've put these three puzzle pieces into a division, we've added additional liquid chromatography and other development projects towards LC-triple quad technology although those have not launched yet.
And as I said, this is easily a $2 billion to $2.5 billion of additional served markets in food testing, food safety, in energy, in petrochemicals, in environmental testing, but also others forensic doping there are other applications. And we have invested, we have almost tripled our R&D investment and what was previously done by Varian, Inc., we've already brought out a number of new products including a very attractive, very high dynamic range sensitivity, trace elemental analysis system, the aurora shown here in the middle for ICP-MS spectrometry.
And what I would think is a game changing product, mainly the SCION family of GC-single quadruple and triple quadruple mass spectrometers, which we launched half a year ago, and which really had terrific up take and which we’re now really shipping in volume from are now centralized Fremont factory, by the way, we moved four factories into one factory. A lot of hard work, a lot of initial investment, but again, I think a very good investment for the future for high profitability and good RoIC.
I won't go through all of these products, but this is the beginning, you'll see a lot more products launched in these applied markets in the next two years, in particular from that CAM division out of Fremont.
This is the initial investment. so if indeed, that $70 million investment that we intend to make up of which is about only $32.5 was the purchase prices are quite low. but we are investing another $37.5 million or so for about $70 million investment before we reach break-even, and we expect that to be a $250 million, 18% operating margin business by about 2016.
As I said earlier, two or three years later than the rest of the corporate average, but of course, this is also the very new division, which gives us large addressable markets and large profitable growth opportunities. And I think it will present another example of an excellent RoIC, if we can execute this plan, it will have excellent RoIC characteristics, which again are very important to Bruker.
We also acquired at a higher price, the ex-Veeco, now Bruker Nano Surfaces division, they are leader in provider of microscopy tools for nanoscale imaging, atomic force microscopy, which has incredibly high-resolution, that’s actually had an inflect – they’re already the leader in that market. But that market has not been growing that fast and we’re trying to change that.
And we think that market has really had an inflection point to where the new capabilities that our BNS division has introduced recently, particularly factor of 20 to 100 times speedup in atomic force microscopy is wonderful, but it’s terrifically slow, it has been. It is now 20 to 100 times faster without lack of image quality. It is become much easier. You don’t need experts anymore. You have [ScanAsyst’s] that can be basically set it up, not quite push button yet, but you don’t optimize thousands of parameters.
And importantly, beyond images and contrasts, which are valuable of course, it now can provide quantitative information. It can provide chemical ID localized. It can provide nano-mechanical and nano-electrical properties. So I think the value of the result and the information is going up dramatically. Reasons why we think the steel, it’s not only fun to have a profitable market leader with over 20% margins. But it’s also a feel that I think can get on this second as curve for growth and that’s why invested in that business and that has done extremely well in its first year under Bruker.
Last but not least, and then I’ll wrap it up in a minute. We have our best division, which is different from the rest of our business. It’s really a very different segment. It’s less than 10% of our revenue, but it had a 40% CAGR in the last few years at about break-even that’s what we asked them to do, grow as rapidly as possible without losing a lot of money. And then we’ll become profitable and this is a larger business. So then in the run rate of about $120 million, it is superconducting tools, materials, devices for MRIs, therefore also for healthcare applications. There is not Bruker as the magnet builder by the GE or Siemens or Philips or other MRI manufacturers in Asia.
We’re also supporting research tools like Bruker’s own research tools, our next-generation Fusion Energy, the ITER project. But I think the really big opportunities for that business are in energy technology in smart grid, in solar, in wind, these are not great investment themes this year, but they will be over the next 10 to 20 years nonetheless even if they’re presently the shakeouts, which is one of the reasons why we have not proceeded with that as one that we had filed sometime ago and we probably are not going to proceed on that IPO for the next two years.
But rather than now when we have made the investment and done the CapEx, we’d rather grow this to a $200 million to $250 million profitable business and then perhaps at some point, I think this will go towards other investors and we, Bruker intend to retain a majority stake at that point that has been our declared strategy all along, but it really has its very large opportunities in areas other, when healthcare in a broad sense. And that’s why I think at some point, perhaps in two to three years, this will be a separate public company.
So with that, I am not going to read this slide. But simply, thank you for joining us late this afternoon. And of course we look forward to talking to some of you during the breakout session. Thank you very much.
[No Q&A session for this event]
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